Glossary of Terms

A Backed Currency - a currency whose value is guaranteed by a product or service. An example would be the gold standard of the 19th century where U.S. dollars were backed by gold.

Arbitrage - the trading practice of buying commodities, securities or foreign exchange for immediate or future delivery in one market while simultaneously selling them in another market in order to profit from the price differences in the two markets.

Balance of payments - the measure of the payments that flow into and out from a country from and to other countries. It is determined by a country's exports and imports, financial capital, as well as financial transfers and foreign exchange.

Barter -The direct exchange of goods and services without the use of any type of money

Banking School was against gold parity. They did not accept the old Real Bills doctrine in its entirety and they wanted some degree of gold convertibility. Click link for detailed info on the Banking School.

Bimetallism - a monetary system that attempts to maintain a fixed exchange ratio between the two precious metals: gold and silver.

Bill of exchange - a self-liquidating bill of credit that matures in 90 days or less and is used to facilitate the production of goods to market without increasing the money supply and hence inflation

Bretton Woods System - an international economic management system used to establish the rules for commercial and financial relations among the world's major industrial states. Click on Bretton Woods Agreement for a detailed report.

Bullion - monetary metals in any other form but that of standard coins. Gold and silver bullion are usually in the form of bars or ingots.

Capital - the economic calculation that expresses in monetary terms the net wealth [assets minus liabilities] of the composite of capital goods and marketable assets [savings] that belong to a specific individual or other unit/group within a market economy.

Capital accumulation - the process of creating or increasing the supply of capital goods. Producing more wealth than is consumed, i.e., saving, is the only way to accumulate capital.

Capital consumption - the process of consuming or reducing the supply of capital goods.

Capital goods - are real products that are used in the production of other products but are not incorporated into the new product.

They include factories, machinery, tools, and various buildings. Capital goods are distinct from raw materials that get used up in the production of goods.

Capital goods are also distinct from financial capital. Capital goods are real things owned by manufacturers.

Financial capital are paper credit and debt instruments or i.o.u.'s or obligations that lay claim to these goods and other future sources of income.

Capitalism - an economic system that is based on the private ownership of the means of production. It is diametrically opposed to all economic systems of State ownership and or control of the means of production; such as communism, socialism, fascism, and other forms of statism.

Cartel - a group of business firms within the same industry, which is formed to limit competition in order to substitute non-free monopoly market prices for competitive free market prices.

Central bank - the monetary agent responsible for the monetary policy of the country it is located within.

Central banks control interest rates, reserve requirements, and note issues of the nation's banks.

Central banks act as the bank of last resort when other banks are pressed for funds while holding investments, which the central bank will discount on demand.

Click link for a more detailed explanation on central banks.

Circulation credit -credit extended by banks in the form of banknotes or demand deposits expressly created for this purpose. This is directly opposed to credit granted by the loan of a bank's own funds, or funds deposited with it by its customers

Commodity money. A physical commodity originally valued for its commercial uses, which has come to be used as money.

Currency - That which circulates and is used as money. It fulfills the medium of exchange function of

money.

Three Main Types of Currency:

Commodity-backed currency - a currency whose value is guaranteed by a physical commodity or service, which backs the currency. The currency is a claim to a given quantity of that commodity, and can be redeemed for that quantity of the commodity.

Fiat - without a reference of comparison to anything else

Commodity valued - when a currency's value is expressed in terms of the value of a particular commodity. The currency does not have to be redeemable in that commodity.

Convertibility - when a currency can be redeemed or converted into a physical commodity that backs it. A ratio between two different currencies that can be exchanged for so many units of the other currency.

Currency School - the currency doctrine maintains that all future changes in the nation's quantity of money should correspond precisely with changes in the nation's holdings of monetary metal, which after 1853 was only gold. For a more detailed explanation use the following link: Currency School.

Deflation - any decrease in the quantity of money, which is not offset by a corresponding decrease in the demand for money, so that a rise in the objective exchange-value (purchasing power) of money occurs

Demand deposit - money placed in or credited to a commercial bank account.

The depositor is legally entitled to withdraw the money on demand without prior notice.

In practice, however, most withdrawals are in the form of checks, which merely transfer sums within the banking system.

Demand deposits are also known as deposit currency or checkbook money.

Deposit currency - the demand deposit liabilities of banks. The total amount held in bank accounts subject to immediate withdrawal or transfer to another account upon presentation of a check signed by the owner of the corresponding bank account. Sometimes referred to as checkbook money.

Depreciation - the loss or reduction in value of a currency as compared to its standard. The loss or reduction of value of one currency in comparison to another.

Depression - a period of economic readjustment that follows a boom created by inflation or credit expansion.

Devaluation - the loss of value of a currency regarding its purchasing power, either compared to its own standard or that of other currencies

Direct exchange - the trading of goods or services by barter, for other goods or services without the intermediary use of money or any other medium of exchange.

Discount Rate - an interest rate calculated and payable in advance. The term usually refers to the official rate charged by the central bank for discounting the short term paper and other eligible investments of other banks.

Fabians - a group of individuals drawn together by their socialist principles and policies, which led them to create the Fabian Society in 1884. Their goal was to introduce socialism into Great Britain under the cover of night. Some well-known Fabians included Sidney and Beatrice Webb, Bernard Shaw and Harold J. Laski.

Fiat currency - a currency created by fiat [Latin, let it be made or let it be done]. The currencies value is guaranteed by the issuing authority rather than by any commodity backing

Fiduciary media - money-substitutes freely accepted at face value, which consist in claims to payment on demand of specified sums of money in excess of the monetary reserves held for their redemption.

Fixed exchange rate - rate fixed by State Authority at which one currency can be exchanged for another.

Floating exchange - rate at which one currency is exchanged for another by the free bidding and asking in the foreign exchange market

Federal Reserve Act of 1913 - the legislative code creating the Federal Reserve System with its 12 Federal Reserve Banks, which act as the United States Central bank.

Federal Reserve Notes - Legal tender notes of the U.S. Federal Reserve System.

From 1914 to 1917, the banknotes had a 40% gold reserve backing. From 1914 to 1933, the notes were redeemable in gold.

In 1933, their redeemability was canceled except for the settlement of foreign trade balances between governments. In 1945, the gold reserve requirement was reduced to "not less than 25%."

In 1968, the gold reserve requirement was dropped. President Nixon suspended their redeemability by foreign governments in 1971. They are now fiat money - backed by nothing but hollow promises.

Free Market - a market in which the government does not interfere with the marketing processes by

intervention using orders, rules, regulations, laws, and prohibitions.

Gold exchange standard - a national monetary system where:

The domestic monetary unit is legally defined as the equivalent of a certain fixed weight of gold, called the parity rate

Only money-substitutes are held by individuals and used in domestic business transactions.

There are no domestic gold coins in circulation (see gold standard below where gold coins circulate).

The monetary authority maintains the value of all money-substitutes at the legally set parity rate by redeeming in gold such money-substitutes as a holder desires to use abroad at the legal parity rate or at rates between the gold export and import points

The monetary authority is the only legally authorized domestic holder of gold and foreign exchange, and exchanges all imports of gold and foreign exchange into domestic legal tender money substitutes at the legal parity rate or at rates between the gold export and import points of such rates.

Gold points. The upper and lower limits beyond which the foreign exchange rates for a gold standard monetary unit cannot go without making it more profitable to ship gold than to buy or sell such foreign exchange.

The limits are set by the costs of shipping gold into or out of the country and such costs include both interest and insurance.

The limit beyond which it becomes more profitable to export gold is known as the gold export point

The limit beyond which it becomes more profitable to import gold is known as the gold import point.

Gold standard - a commodity money standard in which the commodity is gold. The gold standard has the following attributes:

The monetary unit is defined as a certain fixed weight and fineness of gold

Gold coins are used in everyday transactions and are part of the cash holdings of the people

Only gold coins meeting the standard and accordingly approved have unlimited legal tender quality

Gold is exchanged for monetary units and monetary units are redeemed in gold at the fixed rate

There are no restrictions on the ownership of monetary gold or its movement into or out of the country.

Gresham's Law - the belief that "bad money drives out good money."

Inflation - there are several types of inflation. Mainly they all involve an imbalance, loss, depreciation, or debasement of various value determinants.

Monetary Inflation: an increase in the supply of money greater than the present demand for money

Price Inflation: an increase in the prices paid for goods and services

Asset Inflation: an increase in the prices paid for assets such as stocks, bonds, and real estate

Wage Inflation: an increase in the prides paid in or as wages

Loss of Purchasing Power Inflation: the debasement of the currency caused by the continual erosion of its quality or purchasing power as in the objective exchange value it has to exchange or procure other goods and services - this is the worst and most insidious form of inflation - this is the inflation that kills a currency and transfers wealth from the many to the few

Indirect exchange - a method of exchange in which a good or service is exchanged for a third media of exchange referred to as the common medium of exchange, or money, as opposed to direct exchange where one good is exchanged directly for another good without the use of the intervening third media - money.

Inflation - any increase in the quantity of money, which is not offset by a corresponding increase in the demand for money, so that a fall in the objective exchange-value (purchasing power) of money occurs.

Interest - income [interest] paid to the holder of a currency. Money [interest] charged to borrow a currency. Both are time-related.

Interventionism - the policy where the government interferes within the workings of the free market by manipulating rules, regulations, business practices, prices, wages, interest rates, etc.

International Monetary Fund (IMF) - the International organization that was created to administer the Bretton Woods Agreement. Click following link for a more detailed explanation International Monetary Fund - International Monetary Fund.

Legal Tender - the mandatory or forced tender of payment in the settlement of a debt according to the laws of State, especially relating to payment to the State of taxes

Marginal theory of value - value is a subjective valuation of any good or services' utility or use value to satisfy an individual's needs or desires.

Medium of exchange - a highly marketable good for which one exchanges his less marketable goods or services to be able to offer a more acceptable good to the sellers of goods and services one needs to purchase. Any item, which serves to facilitate indirect exchange because of its common acceptance by market participants.

Marginal utility - the additional utility or benefit (fulfillment of a need) that a consumer derives from an additional unit of a commodity or service

Money - the unit of measure of value and the means of payment within a system of indirect exchange, as opposed to barter or the direct exchange of goods.

Money has an economic definition as well as a juristic definition.

Money in the economic sense is a medium of exchange, a measure of value, a standard of value, and a store of value.

Money is the juristic sense is the unit of account of the State, which the State decrees and accepts as payment of debt to the State, especially as in the form of taxes owed to the Sate. It is also known as Legal Tender.

Money has three classic types:

Commodity Money - money that is composed of a commercial commodity such as gold or silver

Fiat Money - money by legal decree or qualification. It is the stamp or mark of approval by the State as legal tender that gives fiat money its life.

Credit Money - a claim falling due in the future that is used as a medium of exchange.

Money-substitutes - claims to money that are convertible at face value upon demand.

Money-substitutes include token money, money-certificates, and fiduciary media.

Fiduciary media in turn include both banknotes and bank deposits subject to check or immediate withdrawal.

Money-substitutes serve all the purposes of money proper

Pound Sterling - the monetary unit of the United Kingdom composed of 20 shillings of 12 Pence each.

During most of the eighteenth century, England was legally on a bimetallic standard, which overvalued silver.

The one-pound coin then became the gold sovereign

During the Napoleonic Wars, the British Government suspended the gold redemption of its Notes from 1797 to 1821.

The gold standard was legally adopted in 1816 and went into effect in 1821.

From 1821 until the outbreak of World War I in 1914, the Bank's Notes and gold sovereigns were interchangeable except for short suspensions in 1847, 1857, and 1866.

The gold standard was resumed in 1925 at the pre-war parity rate of $4.86 for one paper pound.

In 1931, the gold standard was dropped and the value of the pound fell to $3.27 by the end of 1932.

The American devaluation of 1933-1934 raised its dollar value to $5.15, but its value continued to fall until 1940 when it was officially declared to be worth $4.03.

In 1949, it was further devalued to $2.80, for One-pound sterling. The pound has since been further devalued and is no longer officially tied to gold.

Price - goods are valued according to their subjective use-values, and their price or exchange ratios are determined by comparing the exchange value of money with the exchange value of any particular good

Profit - the end goals of all action - the aim or purpose for the fulfillment of a particular want or need

Quantity Theory of Money - a brief explanation will follow, as the subject is very detailed and complicated and will be the focus of pages of articles and discussion.

The theory that changes in the quantity of monetary units tends to affect the purchasing power (quality) of money inversely.

In other words, with every increase in the quantity of money, each monetary unit tends to buy a smaller quantity of goods and services while a decrease in the quantity of monetary units has the opposite effect - all other things being equal, such as supply and demand for goods.

Scrip - a private currency, as opposed to a State or governmental currency. A corporation or an individual usually issues it in the form of a paper IOU note.

Secular - long enduring, long term, usually used in contrast to short term

Socialism - a system of social organization that calls for the public ownership of the means of production. A policy that aims at constructing a society in which all the material means of production is under the exclusive control of the government.

Store of value - an item that is used to save or store value as in purchasing power and or wealth for use in the future

Subjective Theory of Value - the theory that the value of economic goods is in the minds of the individual.

Beauty is in the eyes of the beholder.

Consequently, value is neither constant nor inherent in the goods themselves.

The values of the same good vary and change, just as the judgments of the individuals making the valuations vary, from person to person and from time to time, even for the same person.

Subjective use-value - the value of importance given to goods and services by the judgment of individuals that its use or utility can fulfill the desired need.

Trade cycle - the business cycle.

Unit of account - the value of a good used to measure or compare the value of other goods. Its value is used to denominate the payment of debts. Consequently, a debt or an IOU is not supposed to be used as a unit of account, as its value is determined by the comparison to some external reference value or unit of account to be used for payment.

Utilitarianism - a school of thought that believes that government, private property, tolerance, liberty, freedom and equality under law do not exist because they are natural or just but because they are beneficial to the general welfare.

Usurers - lenders of money at interest, carrying the implication that such lenders charge an exorbitant, or excessively high interest rate.

Value - the importance man gives to goods and services according to their means to fulfill an ultimate end as in the fulfillment of a want, need, or desire.

Velocity - the velocity of money is a term that refers to the speed at which a currency circulates.

Vested interests - established and existing claims, rights, or privileges.